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Pitching to grumpy business

Colin James on business and the election for Management Magazine October

Through the Labour-led governments’ nine years business has been gloomy about the operating environment even though profits have been good and at times in bonanza territory. Is the gloom about to lift?

A superficial reading of the spring lift in business confidence might credit it to the prospect of a National-led government led by a man from business.

Actually, it had more to do with the usual end to winter gloom, the fall in oil prices, the glimmer of an easier labour market, the start of an interest-rate easing and the fall in the exchange rate.

But the wide divorce between companies’ usual positive expectations for themselves and negative expectations for the economy as a whole does suggest politics does affect attitude. If so, a change of government might lighten business up.

But maybe not, for three reasons.

One is the soggy outlook for consumer spending and residential investment through 2009 and maybe into 2010 as consumers unwind their high debt at a time of rising unemployment, constraints on wage rises and falling house prices.

The second is international uncertainty. The credit crunch may well spill into 2009, with unpredictable ramifications for global growth. Even with a lower exchange rate exporters can’t count on riches. A possible exception is food.

The third is that the National party has presented a timid policy face — at least, that’s how many in business see it. The main business-related changes announced by mid-September were lower personal tax, more infrastructure spending, removal of unions’ monopoly on collective bargaining and a sharper focus on literacy and numeracy coupled with trades training.

If bold policy is needed to step-change the economy on to a higher growth path, National had yet to demonstrate that by mid-September. Much will ride on its fiscal policy, including tax, to be announced during the election campaign proper.

A faster growth path is very high on business’s wishlist: 91 per cent told Business New Zealand’s pre-election survey that creating economic growth was the top issue. But 84 per cent said “no” when asked: “Are current policies and programmes already achieving economic growth to New Zealand’s full potential?”

And highest on the barriers to faster growth identified by survey respondents (after poor attitudes to entrepreneurship and business success) was the Employment Relations Act. Put that beside the raft of union-friendly amendments to employment legislation passed this year — yet another, on “triangular relationships” was tabled in September — and you get one clue to why business has been so down in the mouth about operating conditions despite high profits.

Labour-led governments’ boldnesses, at least as business sees it, have not been in ways that boost business (the China free trade agreement excepted). They have been in social policy or in policy areas most business sees as cost. One is labour law. Another is climate change.

Of the respondents 74 per cent said New Zealand should not be a leader in climate change — thereby indicating they see current policy as doing just that — and only 15 per cent thought their businesses would be “able to attain economic opportunities from climate change policies”.

Perhaps 15 per cent represents a first-mover echelon which others will follow in time, an echelon which values the clean-green “brand” and can make a buck out of “sustainability”. Or does it represent widespread opposition to doing much, if anything, on climate change? Or does it say most businesses sees climate change as irrelevant to what they do.

That poses a challenge for the next government since both major parties back a comprehensive emissions trading scheme and both want environmental and economic balance. Labour has made “sustainability” its core policy driver and National’s John Key has talked of “marrying” environmental and economic goals. To make that work, whoever leads the government will need to bring business onside, since business generates most of the wealth.

And that means converting business’s grumpiness into go-getting. And that in turn, means delivering to business’s needs in four main policy areas:

* tax: both the level and the complexity, including KiwiSaver; and the flipside, the level of government spending;

* transaction and compliance costs of laws and dealing with the government, including the Resource Management Act and the Employment Relations Act and related legislation; * innovation and productivity growth.

Underlying all four is where the boundary should be between what the state does and private or non-government initiative. Too much state can crowd business out. Too little can leave business short of skilled, healthy workers.

The younger generations now about to form the majority of both the electorate and governments draw that line differently from the baby-boomers now in charge.

Helen Clark’s governments set out initially to “correct” the “excesses” of 1980s and 1990s market-oriented policy zeal by spending more on social services, health and education, building the state services and increasing economic regulation.

That held taxes up and added to business costs. While the economy boomed, that could be accommodated. As margins are squeezed, the costs are being felt more.

On the plus side the Clark governments have simplified tax compliance and cut the company tax rate (worth more than $2 billion a year all up). They have been identifying options to lighten the impact of regulation and to improve the quality of regulation making.

That can be expected to continue, whichever party leads the government. Rodney Hide’s Regulatory Responsibility Bill died in this Parliament but both Labour and National endorsed its rationale.

The Clark governments are more vulnerable to criticism on innovation. They talked a lot but actually cut government research, science and technology (RS&T) spending in GDP terms. Their trades- and skills-related programmes have fallen short of business needs. Workplace productivity improvement initiatives have yet to bear fruit.

So what about the alternative?

National proposes a new infrastructure ministry, a 20-year plan, a boost in spending (which Labour, which has hugely increased spending on roads and other capital works, says it would match) and more financing flexibility, investment in broadband (Labour has a big programme, too) and faster RMA consents for big projects.

On tax National’s initial focus would be more on personal than business tax. In one area, tax-deductibility for RS&T, National would be less generous — though that might open scope for concessions elsewhere.

In regulation National’s highest-profile focus is the Resource Management Act (RMA). Nick Smith has a detailed programme for the first 100 days and would later tackle longer-term issues, including water, oceans, aquaculture and Public Works Act compensation.

Employment law would be softened by a probationary period for new employees of small businesses and removal of unions’ monopoly on collective bargaining — both fiercely opposed by unions — and a cleanup of the Holidays Act. But there would be no return to the Employment Contracts Act.

In RS&T, while National would make an iconic appointment of a Chief Scientist reporting to the Prime Minister, it would not spend more.

Moreover, while there would be more scope for the private sector in delivering social services, a Key government would not sell or even sell down state assets — including even KiwiRail — and it would tread gently in reshaping state and public services: even the Families Commission, once on National’s chopping block, would stay and so would the increases in spending on the over-65s.

That illustrates National’s obsession not to frighten horses and that way earn a second term.

So a Key government would not greatly change the size of the state. In fact, it would increase spending in some areas (health? law and order?). If it depended on the Maori party for support, that would almost certainly involve extra spending.

Moreover, combining lower personal taxes, limited constraints on the public sector and some spending increases is a recipe for budget deficits and in the long run deficits are not good for business.

The campaign promises are still to come. National may yet surprise business with boldness. If not and if Key is Prime Minister, the focus for business would shift to the second term (asset selldowns? big tax cuts?) — and even then Key has said that he would make no major changes without a mandate.

Key’s model is John Howard. Howard came into office in 1996 on a don’t-frighten-the-horses programme. He took a plan to introduce GST to the voters in 1998 and won. Over four terms much changed.

The counterfactual is that at 38 or 39 per cent Clark could conceivably stay in office with the Greens and Maori party. That cabinet would have more of the likes of David Cunliffe and Shane Jones and also eventually perhaps a new Prime Minister.

For a clue to how such a cabinet might operate, note another late bill introduced in September: a Jones bill to “increase the flexibility and efficiency of the building consent process”. It’s not a sea change. But it may point to a more business-friendly fourth Labour term if National doesn’t make it.